China's energy transition is moving from a climate objective to a major economic restructuring that could reshape electricity prices, industrial competitiveness, energy security and investment decisions for decades. An IMF working paper by Hugo Rojas-Romagosa, Gregor Schwerhoff, Sneha Thube and Sha Yu finds that replacing coal with renewable electricity can ultimately support economic growth, but the outcome depends heavily on how China manages renewable variability, electricity demand and its enormous coal fleet. For policymakers, development partners and investors, the study's central message is that batteries, modern grids and flexible electricity markets could make the transition economically beneficial, while continued coal expansion risks creating stranded assets and regional financial pressures.

China already generates around one-third of the world's electricity. Solar and wind increased from just over 1 percent of electricity generation in 2010 to 18 percent in 2024, while all non-fossil sources reached 38 percent. Yet the challenge is becoming larger: electricity demand could double between 2025 and 2060 as electric vehicles, heating, industrial electrification and artificial-intelligence data centres consume more power.

Batteries Could Change the Economics of China's Green Transition

One of the study's most important findings concerns how China manages intermittent solar and wind generation. If coal plants remain the main backup, variable renewables could provide 57 percent of electricity generation by 2040, supported by 422 GW of coal backup capacity. If batteries become the principal flexibility technology, variable renewable generation could reach 63 percent.

The economic difference is significant. Average annual green-energy investment requirements are estimated at around 2.3 percent of GDP when coal provides backup, compared with 2.1 percent under the battery pathway.

There are short-term costs. Electricity prices could initially rise 2.5–4.5 percent relative to baseline when coal backs renewables. With batteries, the impact ranges from a 0.4 percent decline to a 2.1 percent increase by 2030.

By 2040, however, prices are projected to fall 4.7–5 percent below baseline with coal backup and as much as 7.6–8.6 percent with batteries. Real GDP could consequently be 0.05–0.65 percent higher across the transition scenarios.

For private companies, this creates opportunities across battery manufacturing, renewable generation, grid equipment, electric vehicles, industrial electrification and energy-management technologies.

Cheaper Power Can Strengthen Industry and Energy Security

Lower electricity prices could improve household purchasing power while strengthening the competitiveness of electricity-intensive industries. Manufacturing activity benefits in most scenarios, while coal mining and fossil-fuel-dependent activities face declining demand.

The energy-security implications are equally important. China imported around 14 percent of its energy consumption in 2024. By 2040, the transition could reduce energy-import dependence by approximately 2.2–2.6 percentage points relative to baseline projections. Energy expenditure as a share of GDP could fall by around 1.7–2 percentage points.

AI creates another policy challenge. Electricity demand associated with AI data centres is assumed to grow around 10 percent annually and reach roughly 3.5 percent of total electricity supply by 2040.

If additional AI demand is supplied through coal, electricity prices rise around 5.5 percent by 2030 compared with 4.6 percent without additional AI demand. If solar and batteries supply the additional electricity, prices eventually fall 8.4 percent below baseline by 2040.

This makes renewable infrastructure increasingly relevant to digital and industrial policy, not simply climate policy.

Coal Expansion Risks Creating Billions in Unproductive Assets

The transition's biggest financial danger lies in China's coal fleet. Depending on economic growth, power demand and battery adoption, stranded coal capacity could reach 3–128 GW by 2030 and 61–236 GW by 2040.

China had about 1,397 GW of operating and under-construction coal capacity as of June 2025. More than 200 GW was under construction and another 100 GW had been permitted. The study finds that stopping new construction could reduce stranded capacity by as much as two-thirds in one scenario.

National financial risks appear manageable because coal-power exposure represents less than 1 percent of total bank lending. But losses could be heavily concentrated among provincial economies, utilities and regional banks in coal-dependent areas such as Ningxia, Xinjiang and Inner Mongolia.

Employment is another concern. Coal-mining jobs have already fallen from 5.3 million in 2014 to 2.5 million in 2024. Governments will therefore need retraining, early-retirement programmes, worker mobility support and investment incentives that create alternative industries in coal-producing regions.

For international development institutions, this creates a role for transition finance, technical assistance, regional diversification, worker-reskilling programmes and financing for repurposing existing coal infrastructure.

Net Zero Needs More Than Solar Panels and Wind Turbines

The power transition delivers major emissions reductions but cannot alone achieve China's 2060 carbon-neutrality goal. Coal-backed pathways reduce greenhouse-gas emissions around 12 percent by 2030 and 20–24 percent by 2040 relative to baseline. Battery-backed pathways increase those reductions to approximately 15–16 percent and 24–27 percent, respectively.

Additional policies covering industry and other emitting sectors will therefore be necessary. The study examines a broader emissions-trading system and shows why early action matters. Less aggressive pathways require implicit carbon prices of around $56–$78 per tonne by 2040 and keep GDP losses below 1 percent. A more front-loaded pathway requires about $275 per tonne and produces GDP costs exceeding 4 percent relative to baseline.

The practical recommendation is clear: policymakers should accelerate batteries, transmission networks, pumped storage, smart grids and demand-response systems while becoming more selective about new coal investments. Development partners can support transition finance and regional adjustment, while private investors have growing opportunities in clean-energy infrastructure but rising exposure to coal-related assets.

China's experience ultimately shows that energy transition policy is also economic, industrial, digital and regional-development policy. Done gradually and efficiently, it can deliver cheaper electricity, greater energy security and modest economic gains. Poorly coordinated investment, however, could leave provinces, workers, banks and power companies carrying unnecessary transition costs.